Growth, inheritance tax and Natwest: Five subplots from the latest borrowing figures
The latest borrowing figures have attracted a lot of attention given the vigorous debates between the two major parties about the state of the economy.
The figures showed that government borrowing comfortably exceeded expectations in July, underlining the challenging fiscal position facing Rachel Reeves as the October Budget nears.
But there were a number of other interesting subplots.
Growth
The UK economy has grown surprisingly fast so far this year, surpassing all expectations, but this has not yet pulled through into stronger tax receipts.
Central government’s receipts have totalled £325.9bn since April, 1.8 per cent more than last year but slightly behind the Office for Budget Responsibility’s (OBR) March forecasts.
“The early signs are that better-than-expected growth figures won’t be enough to save Rachel Reeves from tough choices in her first Budget,” Isabel Stockton, senior research economist at the Institute for Fiscal Studies (IFS) said.
Interest bill
Although government spending exceeded expectations in July, the ONS figures showed that debt interest payments actually fell compared to last year.
Interest payable on central government debt was £7.0bn in July, the second highest total in any July since records began in 1997. However, it was still £1bn lower than last year as lower inflation has reduced the ‘uplift’ on index linked gilts.
Net interest payments on the national debt are expected to cost £73.5 billion in 2024-25, the OBR estimates.
Inheritance tax
Rachel Reeves has all but confirmed that taxes will rise in October’s Budget and so attention has turned to which taxes might go up. Inheritance tax is often mentioned, given the range of loopholes which various governments have introduced over the years.
In the first four months of the year inheritance tax raised £2.8bn, a nine per cent increase on the same period last year. This comes off the back of record receipts for the levy last year.
“The combination of frozen thresholds and property price rises are already driving a record Inheritance Tax take, with receipts doubling compared to 2009 when the tax-free threshold was frozen,” Stephen Lowe at retirement specialist Just Group said.
“We will have to wait and see if Rachel Reeves decides that Inheritance Tax can work even harder for the Treasury,” Lowe added.
The IFS has argued that the government could raise an extra £4bn by closing loopholes in the inheritance tax system.
Capital Gains Tax
Another levy which Reeves might consider raising is capital gains tax. So far this financial year, capital gains tax has raised £657m, eight per cent higher than in the same period last year.
Officials have reportedly drawn up plans to bring the rate in line with income tax, the highest rate of which is 45 per cent. Such a move could bring in £16.7bn to the Treasury’s coffers according to one report.
Businesses currently pay a top rate of 20 per cent when they sell shares, while individuals pay the same rate if they fall into the upper income tax bracket. City figures have repeatedly warned the Treasury against such a move.
Natwest
In a blog alongside the public finances bulletin, the ONS confirmed that it had changed the classification of the government’s Natwest shareholding now that its voting rights have fallen below 25 per cent.
This reclassification will have no impact on the headline measure, but will reduce the debt measure which includes public sector banks by around £372bn.
As Natwest was the last public sector bank, once the reclassification has been implemented, the debt measures including and excluding public sector banks will be the same.